Situation in India's banking sector is not grim at all: K V Kamath

Interview with President, New Development Bank (NDB)

New Development Bank (NDB) President K V Kamath says the Beijing-based institution will lend over a $1 billion this year and hopes to raise this to about $2.5 billion next year. He tells Archis Mohan that the BRICS Bank, as it is popularly called, will come out with the rupee-denominated bonds next year in offshore markets. Amid demand for more capital infusion in public sector banks, Kamath says interest rate cuts and consequent correction in bonds would lead to gains for these lenders. He says a year or 18 months down the line, investments will pick up in India, but not through lending. Excerpts:

How has it been building a new organisation?

It's a start-up (laughs). It has been a great experience. I always love learning. When ICICI was built, I had a core team from which it was scaled up, not built up. The superstructure was there, we had to only scale it up. Here you had to start from the foundation.

Having said that, we received tremendous cooperation from the Chinese government. They provided all the start-up material that you require, including people. Other member-countries came in, including support from several banks and institutions and governments. All of this allowed us to get off the ground quickly.

We set a target that we would be in the business in the first year, lend and raise money in the first year. I think we were able to do all three.

How much have you lent so far?

So far, we have lent a little over $900 million. We will do some more this year. I don't want to put a number because the board has to meet next month. So, it will be well over a $1 billion for the current year. Next year, we are setting a target of roughly doubling it to $2.5 billion.

The focus has been on renewables…

In the first year the focus was on green and renewable energy because that underscores our objective of sustainable development and infrastructure. But we will venture into more areas of sustainability in the coming years.

Will the Bank lend beyond BRICS members? Which could be other areas?

We will lend just to BRICS. As for areas, I think water becomes key habitat conservation; roads, urban rejuvenation and environmental issues relating to cities are important. There is a wide variety within a sustainable platform.

How much of the $900 million has come to India so far?

Around $250 million.

You worked in a multilateral agency earlier and have come back to a multilateral agency in two and a half decades. How much has the world changed during this time?

Enormously. I would think, in a way, enormous change in the world puts (NDB) in a unique position. For example, in 1988, even if I just talked of China and India, on the development curve we were at the bottom rung. Probably, our other member-countries were further up that rung. It's a sea change today. Every country has progressed. But the biggest change is that all the five countries together now contribute to more of the incremental growth in the world than any other country or bloc.

To me, probably that was in the minds of the founding fathers, that we need to say that countries of the global south can stand on their own feet.

In that context, BRICS growth has been above five per cent, while that of the rest of the world was around three per cent. Is there a case for greater market integration within BRICS?

If you look at that growth it has been impacted by a few things, particularly events of the last two years. These are all transitionary and would correct, and when they do, growth will come back to an even keel. And you will have strong drivers that will propel this bloc forward. I would think growth will happen on its own.

On greater integration between the five members, I am sure that is happening in other fora in this summit.

Brexit (the UK's exit from the European Union) will probably have ramifications on growth. Where does NDB come into the picture?

We can do very little in that context. Again, I don't know if the impact of Brexit will be even across all BRICS member-countries. But I am not too worried about it for most of our member-countries.

You also had a stint in the Asian Development Bank. There is a sense that multilateral agencies are much more focused on lending to the private sector or have a greater say on how private sector works compared to 10 years back, is that a fair assessment?

No, not entirely. The reason I am saying not entirely is that most multilaterals have a ceiling on how much they would do with the private sector, and that is about 30 per cent. That is what we are aiming at. Some of them are lower than that, except the World Bank, which has the IFC window as an arm that only does private sector.

Clearly, it is an interesting situation, where there could be value addition that development lending institutions globally can bring to the private sector in the context of developing countries. But there is such a large need for core development of investments that I think the institutions find that it keeps them busy. For example, articulated figure of $1.5 trillion in terms of development assistance that is required for infrastructure itself in the developing world, all institutions put together do 15 per cent of that. So, it is not as if we are already meeting a large part of it or a major part of it. So, I think the private sector would be at the margins. I think market mechanisms will have to support private sector initiatives.

On fund raising, do you look at local currency-denominated bonds, say in rupee?

Let me give you a picture on this. The strategy we articulated at the very beginning was that we see merit in local currency funding in all member-countries. Initially, all countries borrowed hard currency funding. Our message was that if you look at the life cycle of a loan and take the exchange rate into account, the actual borrowing cost is probably in the mid-teens.

And then, the events of the past year and a half, when several member country currencies came under pressure, have created a situation where every member country wants to borrow in the local currency. China is happy to borrow in local currency. India has now said they will look at it and so would other members. So that is the reason why we said the first issue will be a bond issue in a member country and we went into China because that market was readily open and we had on-shore access and could hit the market very quickly. It is a sizeable approval, they gave us 10 billion Renminbi, roughly a $1.5 billion, we have done about 30 per cent of that in the first tranche. We will do rest as we go along.

Next will be India because now it is open to receiving rupees. We would look at the offshore market in India. We don't want to crowd out anybody in any of the markets. We would look at what incrementality we bring and where we can access it.

So, offshore could be London?

We don't know which offshore market we would access. We would talk to the government and regulatory agencies here and take the approach that is most appropriate.

There are demands for a rating agency for BRICS. Is that needed?

It is something I need to understand more in detail. On the rating side, I think we need to look at the existing system because if you want to raise money outside your own market you require external rating. In some of our member-countries, even raising money on-shore requires an external rating, so it is in a state of flux.

There is a general feeling that rating agencies have been tight as far as developing countries are concerned, so this issue needs to be understood in a holistic manner and a decision taken later.

And one other thing that we also need to see is if countries or institutions from these countries are looking at hard currency issue or if a rating from a member institution will be acceptable to a marketplace. All these issues will need to be looked at.

My view is that we should be looking at, understanding and then taking a decision. I am sure that is what is being done.

You talked about the support you have received from China. With the Asian Infrastructure Investment Bank (AIIB) coming in, do you think the focus will be diluted on NDB?

Not at all, because AIIB's focus is primarily Asia and we are in the BRICS countries - that is one key differentiator. The second point that needs to be underscored is that the development opportunity is so large that if all institutions put together do 15 per cent of the needs there is scope for cooperation and collaboration. I think that is how we look at AIIB.

How grim is the situation in the banking sector in India?

Honestly, it is not grim at all. If you had asked me this question six month back, I would have said it looks a little grim. But today, it doesn't look grim for the very simple reason that several factors seem to have corrected in India in the past six months. First, I think the trajectory of inflation has changed. Second, it is now reflected in the correction in the interest rate.

For any banking sector revival this, to me, is a ground condition. So, the rupee bond has corrected from a high to below 6.5 per cent today. The lowest in my memory was 5.5 per cent in 2001. So, we are tending towards that.

Now, the little I have seen in the past two days indicates to me that interest rate cuts that have been put in place have created a market to market gain for treasuries of about a hundred thousand crores of rupees, realised or not I don't know, but it is there for the taking.

And if the trajectory continues - and I am reasonably sure given the good monsoon and the things that have been done to control distribution challenges in distribution - inflation should cool. If that happens over the next year, we should expect for every one per cent cut - I don't want to speculate how much the cut would be - Rs 1,500 crore of gains for banks. So, if you add the two, we are looking at Rs 2.5 lakh crore of gains, to be realised or not by banks in their books. I would expect owners to ask banks to find capital through making appropriate choices on balance sheet management. So, that is the first thing.

The big worry of where the capital would come from has been addressed by the marketplace, by the adjustments that are happening in the system.

The third is resolution. I entirely agree that resolution is key. We need to boldly say that we need to resolve. Not talk in terms of incremental recoveries. We need to put assets that are not in use into productive use. For that, banks need to come together and work on resolution. If necessary, the government, either as owner or because it has the keenest interest in growth, or the regulator need to ensure that banks resolve this, because the sense is that the resolution process needs to gather much more steam.

Will a bad bank help in cleaning up?

If resolution is done by banks themselves, and this scheme by RBI (Scheme for Sustainable Structuring of Stressed Assets) where the sustainable part of the debt becomes performing, you may not need a bad bank.

The concern about health of companies and their inability to borrow… How big a concern is that for the economy as a whole in terms of growth, job generation, etc?

I think in the growth paradigm there are several drivers. Government is spending on roads, rail and several other initiatives. So the government becomes a driver. With benign interest rates, I think the retail consumer is going to be a big driver. And, when that retail demand picks up, I would think that the private sector would have better capacity utilisation, cash flows and would look at capacity creation. It will happen in sequence. If I remember, the last capacity increase happened between 2003 and 2005-6, and a large part of it happened through internal cash generation with better profitability. So, as a bank, we were lending to retail and infrastructure but not to corporate India. I think something like that might happen here, and a year or 18 months down the line investment will happen but not through the lending route.

How critical is the recent talk of consolidation in the public sector banking space for the next stage of reforms?

I would leave that to the experts. But I would broadly say that the process needs to be looked at in the context of all the developments that have been happening in the banking space, particularly technology and digitisation. I am sure that will be looked at holistically by the team that is in place and the board that has been set up.

New banks, like payments banks, are coming up. How do you view this?

There is a sea change that is happening. Banks will have to be more nimble, completely technology integrated and able to move with the times.

The challenge that will happen is whether there is regulatory arbitrage between these new players and older players. I am sure the regulator will keep an eye on that to make sure that each one can operate in its space in the most competitive manner.

New Development Bank (NDB) President K V Kamath says the Beijing-based institution will lend over a $1 billion this year and hopes to raise this to about $2.5 billion next year. He tells Archis Mohan that the BRICS Bank, as it is popularly called, will come out with the rupee-denominated bonds next year in offshore markets. Amid demand for more capital infusion in public sector banks, Kamath says interest rate cuts and consequent correction in bonds would lead to gains for these lenders. He says a year or 18 months down the line, investments will pick up in India, but not through lending. Excerpts:

How has it been building a new organisation?

It's a start-up (laughs). It has been a great experience. I always love learning. When ICICI was built, I had a core team from which it was scaled up, not built up. The superstructure was there, we had to only scale it up. Here you had to start from the foundation.

Having said that, we received tremendous cooperation from the Chinese government. They provided all the start-up material that you require, including people. Other member-countries came in, including support from several banks and institutions and governments. All of this allowed us to get off the ground quickly.

We set a target that we would be in the business in the first year, lend and raise money in the first year. I think we were able to do all three.

How much have you lent so far?

So far, we have lent a little over $900 million. We will do some more this year. I don't want to put a number because the board has to meet next month. So, it will be well over a $1 billion for the current year. Next year, we are setting a target of roughly doubling it to $2.5 billion.

The focus has been on renewables…

In the first year the focus was on green and renewable energy because that underscores our objective of sustainable development and infrastructure. But we will venture into more areas of sustainability in the coming years.

Will the Bank lend beyond BRICS members? Which could be other areas?

We will lend just to BRICS. As for areas, I think water becomes key habitat conservation; roads, urban rejuvenation and environmental issues relating to cities are important. There is a wide variety within a sustainable platform.

How much of the $900 million has come to India so far?

Around $250 million.

You worked in a multilateral agency earlier and have come back to a multilateral agency in two and a half decades. How much has the world changed during this time?

Enormously. I would think, in a way, enormous change in the world puts (NDB) in a unique position. For example, in 1988, even if I just talked of China and India, on the development curve we were at the bottom rung. Probably, our other member-countries were further up that rung. It's a sea change today. Every country has progressed. But the biggest change is that all the five countries together now contribute to more of the incremental growth in the world than any other country or bloc.

To me, probably that was in the minds of the founding fathers, that we need to say that countries of the global south can stand on their own feet.

In that context, BRICS growth has been above five per cent, while that of the rest of the world was around three per cent. Is there a case for greater market integration within BRICS?

If you look at that growth it has been impacted by a few things, particularly events of the last two years. These are all transitionary and would correct, and when they do, growth will come back to an even keel. And you will have strong drivers that will propel this bloc forward. I would think growth will happen on its own.

On greater integration between the five members, I am sure that is happening in other fora in this summit.

Brexit (the UK's exit from the European Union) will probably have ramifications on growth. Where does NDB come into the picture?

We can do very little in that context. Again, I don't know if the impact of Brexit will be even across all BRICS member-countries. But I am not too worried about it for most of our member-countries.

You also had a stint in the Asian Development Bank. There is a sense that multilateral agencies are much more focused on lending to the private sector or have a greater say on how private sector works compared to 10 years back, is that a fair assessment?

No, not entirely. The reason I am saying not entirely is that most multilaterals have a ceiling on how much they would do with the private sector, and that is about 30 per cent. That is what we are aiming at. Some of them are lower than that, except the World Bank, which has the IFC window as an arm that only does private sector.

Clearly, it is an interesting situation, where there could be value addition that development lending institutions globally can bring to the private sector in the context of developing countries. But there is such a large need for core development of investments that I think the institutions find that it keeps them busy. For example, articulated figure of $1.5 trillion in terms of development assistance that is required for infrastructure itself in the developing world, all institutions put together do 15 per cent of that. So, it is not as if we are already meeting a large part of it or a major part of it. So, I think the private sector would be at the margins. I think market mechanisms will have to support private sector initiatives.

On fund raising, do you look at local currency-denominated bonds, say in rupee?

Let me give you a picture on this. The strategy we articulated at the very beginning was that we see merit in local currency funding in all member-countries. Initially, all countries borrowed hard currency funding. Our message was that if you look at the life cycle of a loan and take the exchange rate into account, the actual borrowing cost is probably in the mid-teens.

And then, the events of the past year and a half, when several member country currencies came under pressure, have created a situation where every member country wants to borrow in the local currency. China is happy to borrow in local currency. India has now said they will look at it and so would other members. So that is the reason why we said the first issue will be a bond issue in a member country and we went into China because that market was readily open and we had on-shore access and could hit the market very quickly. It is a sizeable approval, they gave us 10 billion Renminbi, roughly a $1.5 billion, we have done about 30 per cent of that in the first tranche. We will do rest as we go along.

Next will be India because now it is open to receiving rupees. We would look at the offshore market in India. We don't want to crowd out anybody in any of the markets. We would look at what incrementality we bring and where we can access it.

So, offshore could be London?

We don't know which offshore market we would access. We would talk to the government and regulatory agencies here and take the approach that is most appropriate.

There are demands for a rating agency for BRICS. Is that needed?

It is something I need to understand more in detail. On the rating side, I think we need to look at the existing system because if you want to raise money outside your own market you require external rating. In some of our member-countries, even raising money on-shore requires an external rating, so it is in a state of flux.

There is a general feeling that rating agencies have been tight as far as developing countries are concerned, so this issue needs to be understood in a holistic manner and a decision taken later.

And one other thing that we also need to see is if countries or institutions from these countries are looking at hard currency issue or if a rating from a member institution will be acceptable to a marketplace. All these issues will need to be looked at.

My view is that we should be looking at, understanding and then taking a decision. I am sure that is what is being done.

You talked about the support you have received from China. With the Asian Infrastructure Investment Bank (AIIB) coming in, do you think the focus will be diluted on NDB?

Not at all, because AIIB's focus is primarily Asia and we are in the BRICS countries - that is one key differentiator. The second point that needs to be underscored is that the development opportunity is so large that if all institutions put together do 15 per cent of the needs there is scope for cooperation and collaboration. I think that is how we look at AIIB.

How grim is the situation in the banking sector in India?

Honestly, it is not grim at all. If you had asked me this question six month back, I would have said it looks a little grim. But today, it doesn't look grim for the very simple reason that several factors seem to have corrected in India in the past six months. First, I think the trajectory of inflation has changed. Second, it is now reflected in the correction in the interest rate.

For any banking sector revival this, to me, is a ground condition. So, the rupee bond has corrected from a high to below 6.5 per cent today. The lowest in my memory was 5.5 per cent in 2001. So, we are tending towards that.

Now, the little I have seen in the past two days indicates to me that interest rate cuts that have been put in place have created a market to market gain for treasuries of about a hundred thousand crores of rupees, realised or not I don't know, but it is there for the taking.

And if the trajectory continues - and I am reasonably sure given the good monsoon and the things that have been done to control distribution challenges in distribution - inflation should cool. If that happens over the next year, we should expect for every one per cent cut - I don't want to speculate how much the cut would be - Rs 1,500 crore of gains for banks. So, if you add the two, we are looking at Rs 2.5 lakh crore of gains, to be realised or not by banks in their books. I would expect owners to ask banks to find capital through making appropriate choices on balance sheet management. So, that is the first thing.

The big worry of where the capital would come from has been addressed by the marketplace, by the adjustments that are happening in the system.

The third is resolution. I entirely agree that resolution is key. We need to boldly say that we need to resolve. Not talk in terms of incremental recoveries. We need to put assets that are not in use into productive use. For that, banks need to come together and work on resolution. If necessary, the government, either as owner or because it has the keenest interest in growth, or the regulator need to ensure that banks resolve this, because the sense is that the resolution process needs to gather much more steam.

Will a bad bank help in cleaning up?

If resolution is done by banks themselves, and this scheme by RBI (Scheme for Sustainable Structuring of Stressed Assets) where the sustainable part of the debt becomes performing, you may not need a bad bank.

The concern about health of companies and their inability to borrow… How big a concern is that for the economy as a whole in terms of growth, job generation, etc?

I think in the growth paradigm there are several drivers. Government is spending on roads, rail and several other initiatives. So the government becomes a driver. With benign interest rates, I think the retail consumer is going to be a big driver. And, when that retail demand picks up, I would think that the private sector would have better capacity utilisation, cash flows and would look at capacity creation. It will happen in sequence. If I remember, the last capacity increase happened between 2003 and 2005-6, and a large part of it happened through internal cash generation with better profitability. So, as a bank, we were lending to retail and infrastructure but not to corporate India. I think something like that might happen here, and a year or 18 months down the line investment will happen but not through the lending route.

How critical is the recent talk of consolidation in the public sector banking space for the next stage of reforms?

I would leave that to the experts. But I would broadly say that the process needs to be looked at in the context of all the developments that have been happening in the banking space, particularly technology and digitisation. I am sure that will be looked at holistically by the team that is in place and the board that has been set up.

New banks, like payments banks, are coming up. How do you view this?

There is a sea change that is happening. Banks will have to be more nimble, completely technology integrated and able to move with the times.

The challenge that will happen is whether there is regulatory arbitrage between these new players and older players. I am sure the regulator will keep an eye on that to make sure that each one can operate in its space in the most competitive manner.

Situation in India's banking sector is not grim at all: K V Kamath

Interview with President, New Development Bank (NDB)

Interview with President, New Development Bank (NDB)New Development Bank (NDB) President K V Kamath says the Beijing-based institution will lend over a $1 billion this year and hopes to raise this to about $2.5 billion next year. He tells Archis Mohan that the BRICS Bank, as it is popularly called, will come out with the rupee-denominated bonds next year in offshore markets. Amid demand for more capital infusion in public sector banks, Kamath says interest rate cuts and consequent correction in bonds would lead to gains for these lenders. He says a year or 18 months down the line, investments will pick up in India, but not through lending. Excerpts:

How has it been building a new organisation?

It's a start-up (laughs). It has been a great experience. I always love learning. When ICICI was built, I had a core team from which it was scaled up, not built up. The superstructure was there, we had to only scale it up. Here you had to start from the foundation.

Having said that, we received tremendous cooperation from the Chinese government. They provided all the start-up material that you require, including people. Other member-countries came in, including support from several banks and institutions and governments. All of this allowed us to get off the ground quickly.

We set a target that we would be in the business in the first year, lend and raise money in the first year. I think we were able to do all three.

How much have you lent so far?

So far, we have lent a little over $900 million. We will do some more this year. I don't want to put a number because the board has to meet next month. So, it will be well over a $1 billion for the current year. Next year, we are setting a target of roughly doubling it to $2.5 billion.

The focus has been on renewables…

In the first year the focus was on green and renewable energy because that underscores our objective of sustainable development and infrastructure. But we will venture into more areas of sustainability in the coming years.

Will the Bank lend beyond BRICS members? Which could be other areas?

We will lend just to BRICS. As for areas, I think water becomes key habitat conservation; roads, urban rejuvenation and environmental issues relating to cities are important. There is a wide variety within a sustainable platform.

How much of the $900 million has come to India so far?

Around $250 million.

You worked in a multilateral agency earlier and have come back to a multilateral agency in two and a half decades. How much has the world changed during this time?

Enormously. I would think, in a way, enormous change in the world puts (NDB) in a unique position. For example, in 1988, even if I just talked of China and India, on the development curve we were at the bottom rung. Probably, our other member-countries were further up that rung. It's a sea change today. Every country has progressed. But the biggest change is that all the five countries together now contribute to more of the incremental growth in the world than any other country or bloc.

To me, probably that was in the minds of the founding fathers, that we need to say that countries of the global south can stand on their own feet.

In that context, BRICS growth has been above five per cent, while that of the rest of the world was around three per cent. Is there a case for greater market integration within BRICS?

If you look at that growth it has been impacted by a few things, particularly events of the last two years. These are all transitionary and would correct, and when they do, growth will come back to an even keel. And you will have strong drivers that will propel this bloc forward. I would think growth will happen on its own.

On greater integration between the five members, I am sure that is happening in other fora in this summit.

Brexit (the UK's exit from the European Union) will probably have ramifications on growth. Where does NDB come into the picture?

We can do very little in that context. Again, I don't know if the impact of Brexit will be even across all BRICS member-countries. But I am not too worried about it for most of our member-countries.

You also had a stint in the Asian Development Bank. There is a sense that multilateral agencies are much more focused on lending to the private sector or have a greater say on how private sector works compared to 10 years back, is that a fair assessment?

No, not entirely. The reason I am saying not entirely is that most multilaterals have a ceiling on how much they would do with the private sector, and that is about 30 per cent. That is what we are aiming at. Some of them are lower than that, except the World Bank, which has the IFC window as an arm that only does private sector.

Clearly, it is an interesting situation, where there could be value addition that development lending institutions globally can bring to the private sector in the context of developing countries. But there is such a large need for core development of investments that I think the institutions find that it keeps them busy. For example, articulated figure of $1.5 trillion in terms of development assistance that is required for infrastructure itself in the developing world, all institutions put together do 15 per cent of that. So, it is not as if we are already meeting a large part of it or a major part of it. So, I think the private sector would be at the margins. I think market mechanisms will have to support private sector initiatives.

On fund raising, do you look at local currency-denominated bonds, say in rupee?

Let me give you a picture on this. The strategy we articulated at the very beginning was that we see merit in local currency funding in all member-countries. Initially, all countries borrowed hard currency funding. Our message was that if you look at the life cycle of a loan and take the exchange rate into account, the actual borrowing cost is probably in the mid-teens.

And then, the events of the past year and a half, when several member country currencies came under pressure, have created a situation where every member country wants to borrow in the local currency. China is happy to borrow in local currency. India has now said they will look at it and so would other members. So that is the reason why we said the first issue will be a bond issue in a member country and we went into China because that market was readily open and we had on-shore access and could hit the market very quickly. It is a sizeable approval, they gave us 10 billion Renminbi, roughly a $1.5 billion, we have done about 30 per cent of that in the first tranche. We will do rest as we go along.

Next will be India because now it is open to receiving rupees. We would look at the offshore market in India. We don't want to crowd out anybody in any of the markets. We would look at what incrementality we bring and where we can access it.

So, offshore could be London?

We don't know which offshore market we would access. We would talk to the government and regulatory agencies here and take the approach that is most appropriate.

There are demands for a rating agency for BRICS. Is that needed?

It is something I need to understand more in detail. On the rating side, I think we need to look at the existing system because if you want to raise money outside your own market you require external rating. In some of our member-countries, even raising money on-shore requires an external rating, so it is in a state of flux.

There is a general feeling that rating agencies have been tight as far as developing countries are concerned, so this issue needs to be understood in a holistic manner and a decision taken later.

And one other thing that we also need to see is if countries or institutions from these countries are looking at hard currency issue or if a rating from a member institution will be acceptable to a marketplace. All these issues will need to be looked at.

My view is that we should be looking at, understanding and then taking a decision. I am sure that is what is being done.

You talked about the support you have received from China. With the Asian Infrastructure Investment Bank (AIIB) coming in, do you think the focus will be diluted on NDB?

Not at all, because AIIB's focus is primarily Asia and we are in the BRICS countries - that is one key differentiator. The second point that needs to be underscored is that the development opportunity is so large that if all institutions put together do 15 per cent of the needs there is scope for cooperation and collaboration. I think that is how we look at AIIB.

How grim is the situation in the banking sector in India?

Honestly, it is not grim at all. If you had asked me this question six month back, I would have said it looks a little grim. But today, it doesn't look grim for the very simple reason that several factors seem to have corrected in India in the past six months. First, I think the trajectory of inflation has changed. Second, it is now reflected in the correction in the interest rate.

For any banking sector revival this, to me, is a ground condition. So, the rupee bond has corrected from a high to below 6.5 per cent today. The lowest in my memory was 5.5 per cent in 2001. So, we are tending towards that.

Now, the little I have seen in the past two days indicates to me that interest rate cuts that have been put in place have created a market to market gain for treasuries of about a hundred thousand crores of rupees, realised or not I don't know, but it is there for the taking.

And if the trajectory continues - and I am reasonably sure given the good monsoon and the things that have been done to control distribution challenges in distribution - inflation should cool. If that happens over the next year, we should expect for every one per cent cut - I don't want to speculate how much the cut would be - Rs 1,500 crore of gains for banks. So, if you add the two, we are looking at Rs 2.5 lakh crore of gains, to be realised or not by banks in their books. I would expect owners to ask banks to find capital through making appropriate choices on balance sheet management. So, that is the first thing.

The big worry of where the capital would come from has been addressed by the marketplace, by the adjustments that are happening in the system.

The third is resolution. I entirely agree that resolution is key. We need to boldly say that we need to resolve. Not talk in terms of incremental recoveries. We need to put assets that are not in use into productive use. For that, banks need to come together and work on resolution. If necessary, the government, either as owner or because it has the keenest interest in growth, or the regulator need to ensure that banks resolve this, because the sense is that the resolution process needs to gather much more steam.

Will a bad bank help in cleaning up?

If resolution is done by banks themselves, and this scheme by RBI (Scheme for Sustainable Structuring of Stressed Assets) where the sustainable part of the debt becomes performing, you may not need a bad bank.

The concern about health of companies and their inability to borrow… How big a concern is that for the economy as a whole in terms of growth, job generation, etc?

I think in the growth paradigm there are several drivers. Government is spending on roads, rail and several other initiatives. So the government becomes a driver. With benign interest rates, I think the retail consumer is going to be a big driver. And, when that retail demand picks up, I would think that the private sector would have better capacity utilisation, cash flows and would look at capacity creation. It will happen in sequence. If I remember, the last capacity increase happened between 2003 and 2005-6, and a large part of it happened through internal cash generation with better profitability. So, as a bank, we were lending to retail and infrastructure but not to corporate India. I think something like that might happen here, and a year or 18 months down the line investment will happen but not through the lending route.

How critical is the recent talk of consolidation in the public sector banking space for the next stage of reforms?

I would leave that to the experts. But I would broadly say that the process needs to be looked at in the context of all the developments that have been happening in the banking space, particularly technology and digitisation. I am sure that will be looked at holistically by the team that is in place and the board that has been set up.

New banks, like payments banks, are coming up. How do you view this?

There is a sea change that is happening. Banks will have to be more nimble, completely technology integrated and able to move with the times.

The challenge that will happen is whether there is regulatory arbitrage between these new players and older players. I am sure the regulator will keep an eye on that to make sure that each one can operate in its space in the most competitive manner.